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Prepayment
Options:
Fannie Mae
offers several options for prepayment of most DUS loans
so borrowers can choose the option that best meets their
particular financing needs.
Eligible Products
Yield maintenance can be used for any fixed-rate loan in
a cash or MBS execution.
Defeasance is generally available for fixed-rate loans
with terms less than or equal to ten and a half years,
and may be used for cash or MBS executions.
The graduated prepayment option is available for
fixed-rate 5-, 7-, and 10-year term loans, cash
execution only. It is not available for MBS, Forward
Commitments, or on loans with the Extended Maturity
feature.
Yield Maintenance
Yield maintenance is a prepayment premium that allows
the investor to attain the same yield as if the borrower
had made all scheduled payments until the end of the
specified Yield Maintenance Period. Yield maintenance
premiums are designed to make investors indifferent to
prepayment by the borrower.
The yield maintenance prepayment premium is calculated
as the greater of: a) 1% of the unpaid principal
balance; or b) the product of (i) the unpaid principal
balance and (ii) the present value of the difference
between the mortgage note rate and the yield on a
reference Treasury security designated in the loan
document. The present value, discounted by the yield on
the reference Treasury, is calculated to the end of the
Yield Maintenance Period rather than to maturity.
Prepayments made after the expiration of the Yield
Maintenance Period, but before 3 months prior to loan
maturity, are subject to a prepayment premium equal to
1% of the unpaid principal balance. No prepayment
premium is charged during the 3 months prior to loan
maturity.
Yield maintenance can be used in conjunction with any
fixed-rate loan in a cash or MBS execution. Yield
maintenance is not used in conjunction with
adjustable-rate loans.
Defeasance
Under defeasance, rather than prepaying the mortgage,
the borrower obtains a release of the lien on the
property by purchasing a single Fannie Mae bond with
cash flows identical to those of the mortgage and then
pledging the bond as substitute collateral for the loan.
Because Fannie Mae defeasance can be accomplished with
the purchase of a single bond, it can be much easier and
less costly for the borrower than defeasance
accomplished by purchasing a series of Treasury or other
government securities.
Defeasance is available for fixed-rate loans with terms
of 10.5 years or less, including cash loans and loans in
MBS or REMICs. A loan may not be defeased during the
first three years from origination or within the first
two years after being added to a REMIC.
Graduated Prepayment
The graduated prepayment premium option is available for
fixed-rate loans with 5-, 7-, or 10-year terms. The
graduated prepayment schedule is a fixed percentage of
the unpaid principal balance of the loan at the time of
prepayment and generally declines as the loan approaches
maturity. For example, the prepayment premium schedule
for a 5-year loan may be 5% in year one, 4% in year two,
3% in year three, 2% in year four, and 1% in year five.
If you
require additional information, or would like to speak
to one of our commercial financing specialists, please call
us at 888.488.3807 or
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